Executive Summary - Challenges of African Growth

This report is one of a series of “Flagship Studies” intended to help clarify the opportunities, constraints, and strategic directions facing Africa and its partners as they attempt to accelerate economic growth to reduce poverty and put Africa on a path toward meeting the Millennium Development Goals (MDGs). It is part of the analytic work promised in a plan entitled “Meeting the Challenges of Africa’s Development,” also known as the African Action Plan (AAP), discussed at the World Bank Board in 2005. The AAP has a strong focus on “increasing shared growth,” and recommends several actions by the World Bank that will support accelerating growth. Offering both a long-term approach and country-specific analysis, the report recommends learning from history and from diverse experiences to guide countries’ growth diagnostic work and strategies for scaling up growth. The World Bank’s Africa Region intends to provide further studies in this series that will examine several of the areas critical to growth in much greater depth. A study on financial markets is nearing completion. Another on infrastructure is being drafted.

Substantively, this report draws lessons from 45 years of growth experience in Africa and around the world, providing an important repository of lessons learned to shape growth strategies in Africa. It is influenced by, and builds upon, three major studies — The Political Economy of Economic Growth in Africa, 1960–2000, conducted under the African Economic Research Consortium (AERC); Can Africa Claim the 21st Century?, produced collaboratively between the World Bank and African partner institutions; and the World Bank’s study, Economic Growth in the 1990s: Learning from a Decade of Reform, which draws from in-depth reflection on growth experiences by respected practitioners.

The current report will seek to answer three key issues: (1) the opportunities and hence, options for growth available to the diverse range of African countries; (2) the major constraints to exploiting these opportunities; and (3) the strategic choices to be made by African governments as well as by development partners, including the World Bank, in supporting actions taken by African countries.

The distinguishing characteristic of this study is its long-term perspective, together with its analysis and description of the African growth experience from 1960 (the time when most African countries became independent) to the present. Although there are some commonalities among countries, the growth experiences are also quite diverse, with a few countries experiencing consistent long-term growth, a few experiencing long-term stagnation and decline, and the majority experiencing growth between 1960 and 1973, decline between 1974 and 1994, and renewed growth since 1995. This long-term perspective explains the current situation in which African countries, for the most part, find themselves— low levels of per capita income and high levels of poverty.

Six countries have more than tripled their per capita incomes between 1960 and 2005, nine countries have per capita incomes equal to or less than where they started in 1960 and the rest have seen some net improvement, but not enough to make a real dent in poverty levels. Many countries seen as fast growers in 1970, such as Côte d’Ivoire, flamed out and have found themselves stagnating or declining during the past 30 years. The critical point is that frequently, over the long term, the tortoise beats the hare. Steady progress and consistent performance, in good times as in bad, are the watchwords. Many African countries made policy choices in 1974 that continue to haunt them today, whereas a few are experiencing the blessings of different choices made at the same time.

The report draws six key lessons to inform the growth strategies in Sub-Saharan Africa.

• African countries’ growth experience is extremely varied and episodic. From a regional strategic perspective, addressing two challenges peculiar to the region is the key to success—the slow growth of large countries and the extreme instability of growth across a large number of African countries. Countries with large populations, such as the Sudan, the Democratic Republic of Congo, Nigeria, and Ethiopia, will have to grow more rapidly and on a more sustained basis to improve the livelihood of a “typical” African and to generate regional traction through positive spillover effects, similar to the experiences in Southern Africa and East Asia. Another cross-cutting challenge for the region is how to best manage responses to shocks, particularly in the resource-rich countries, in which their fortunes are currently closely tied to the fortunes of key minerals in the world market.
• Although lower levels of investment are important for explaining Africa’s slower growth, it is the slower productivity growth that more sharply distinguishes African growth performance from that of the rest of the world. Investment in Africa yields less than half the return measured in growth terms than in other developing regions. This situation clearly calls for looking beyond creating conditions for attracting new investors to more explicitly pursuing measures that help to raise productivity of existing and new investment. These include reducing transactions costs for private enterprise, particularly indirect costs; supporting innovation to take advantage of new technological opportunities; and improving skills and institutional capacity to support productivity growth and competitiveness. African countries and populations are still highly dependent on agriculture for food, exports, and income earning more broadly. Productivity in this sector lags far behind the phenomenal progress made in Asia and Latin America, and should be a key target for raising overall productivity of African economies.
• Consistent with much of the cross-country growth analysis, evidence from the research reviewed earlier suggests that policy and governance matter a great deal for growth. Taking 45 years of African growth experience as a whole and controlling for differences in the composition of opportunities, the impacts of poor policy have been shown to typically account for between one-quarter and one-half of the difference in predicted growth between African and non-African developing countries. However, the evidence also suggests that the importance of policy in explaining the growth differential between African countries and others may have waned since the 1990s as a result of major reforms implemented in the region, which have moved policy performance in African countries much closer to the global average. Thus, whereas it is imperative for countries to identify and address other binding constraints, sustaining these gains in the improvement of the policy environment will have to be a permanent feature of any growth strategy adopted by a country. In particular, it means maintaining durable macroeconomic stability and continued propping up of efficient market functioning.
• Overcoming disadvantages arising from geographic isolation and fragmentation, as well as natural resource dependence, will be necessary if Africa is to close the growth gap with other regions. Estimates show that taking actions to compensate for these disadvantages may facilitate closing up to one-third of the growth gap with other developing countries. With much higher proportions of countries and populations in Africa being landlocked and resource rich, it is necessary to compensate for these disadvantages, primarily by closing the infrastructure gap and better managing and using resource rents.
• Growth of trading partners’ economies has a very powerful influence. The key transmission mechanisms are trade and capital flows, requiring greater openness, strengthening capabilities for taking advantage of the rapid growth in the global markets, and improving the investment climate to make African countries better destinations for global capital than in the past. On the side of trade, evidence shows that integration with global markets is associated with higher growth, underpinning the need for growth strategies to emphasize scaling up and diversifying exports. Enhanced competitiveness and reduced barriers to trade are the two critical areas of action. It is important to note that although concerns with border trade policies and facilities (for example, port capacity and efficiency) are still crucial, increasingly, constraints such as infrastructure, standards, and access to information have become much more binding. A core part of any growth strategy, therefore, will need to target reducing the costs of transacting trade—particularly reducing supply chain costs, as well as the cost of trade processes.
• The analysis points to a very large role played by the delayed demographic transition in Africa in explaining its relatively slower growth performance. In all the empirical studies of the sources of growth differences, the demographic variables consistently predict two-thirds of the observed difference between average growth in Sub-Saharan Africa and other developing regions. Two types of consequences from this delayed transition are particularly important. The first, and probably the biggest, challenge is the uncharacteristically high level of age dependency, with its implications on fiscal and household/parental pressure for taking care of the overwhelming number of the young. The second relates to the rapid growth of the labor force, potentially a positive driver of growth but also possibly a negative force if employment opportunities do not keep pace. The latter concern relates to the growing potential instability from rapidly rising youth unemployment. Whereas the strategy needs to address the fundamentals of the slow demographic transition such as how to speed up a reduction in fertility, appropriate actions are also needed to increase employability of youth and expand opportunities to engage in a growing private sector at home.

This analysis then leads to a set of four specific pillars—areas where investment is needed to accelerate growth. These four pillars are critical but not comprehensive. They are as follows:

Improving the investment climate, mainly focused on reducing indirect costs to firms (which are generally infrastructure related), with energy and transportation topping the list of major impediments; and reducing and mitigating risk, particularly those relating to security of property, such as poor adjudication of disputes, crime, political instability, and macroeconomic instability. Although effort in individual countries is the focal point of action, we also suggest pooling efforts to develop cohesive investment areas by coordinating investment promotion, coordinating policy, improving security, and increasing connectivity.

The second pillar is infrastructure, mainly targeting transactions costsin production of goods and services. Transportation and energy make up the largest proportion of indirect costs for businesses, weighing heavily on the competitiveness of firms in most African countries in which investment climate surveys were conducted. Particular focus would be on how to reduce the high costs associated with the remoteness of landlocked countries to facilitate trade with neighbors, as well as with the rest of the world. It is clear that there will be a need to look beyond individual country borders and adopt a regional approach to coordinate cross-border infrastructure investment, maintenance, operational management, and use (for example, power pooling) to lower costs.

The third pillar is innovation, primarily emphasizing investment in information technology and skill formation (higher education) for enhanced productivity and competitiveness. The potential comparative advantage of low wages in Africa can be nullified by low productivity. Surveys of investors show that labor is not cheap where productivity is low. Information and communication technology (ICT) is now the main driver for productivity growth. There is strong empirical evidence that shows that i nvestment in ICT and i n higher education boosts competitiveness, making both key parts of the growth agenda.African countries can make a huge leap forward and over antiquated technology by exploiting the ICT technological advantages as late starters.

The fourth pillar is institutional capacity.The results from the investment climate assessment surveys and analysis for the World Development Report (2005) identify costs associated with contract enforcement difficulties, crime, corruption, and regulation as being among those weighing most heavily on the profitability of enterprises. The main focus of action here would be partly to strengthen the capacity of relevant public institutions for protecting property rights, and partly to strengthen scrutiny of, and accountability for, public actions. Building institutional capacity entails strengthening individual competencies, organizational effectiveness, and rules of the game. Under this pillar, particular attention should be paid to capacity and space for scrutiny of public action —mainly within a framework of a strong domestic accountability system and capacity to clarify and protect property rights to spur private enterprise. The key strategic areas of action, therefore, include enforcement of contracts (for example, commercial courts); exercise of voice as an agency of restraint — with enhanced involvement of civil society, media, and parliament; enhanced revenue transparency in resource-rich countries; and prevention of corruption as a country-driven agenda — including checks and balances.

Applying these strategies in a specific country context is beyond the scope of this study. Each country faces its own challenges and opportunities. Each country has to work within its own historical and geographical resources and constraints. Dealing with these specific situations is a subject of specific analysis and beyond the scope of a generalized study such as this one. Nevertheless, we hope that the ideas and approaches raised here will enable analysts and policy-makers at the country level to approach their particular challenges with a more informed sense of what may be important, and of what has worked in the past in other situations.